This question has been coming up a lot lately in the media and some academic journals. Thinking Modern Portfolio Theory died last year is based on the misconception that Modern Portfolio Theory will guarantee against a loss.
That is simply not the case. What MPT believes is diversification to a portfolio, which over the long term can potentially reduce a portfolio’s volatility versus a single asset portfolio.
According to a recent article in Investment News:
- MPT does not guarantee against a loss
- Fixed income helped reduce the amount of loss in many portfolios last year
- Many advisors are finding that their clients had too much equities and not enough fixed income for their risk tolerance
Remember, when investing in a diversified portfolio, you will experience negative returns periodically.
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